EXPORTS AND LONG-RUN GROWTH IN VIETNAM, 1976-2001(Paper to be published in ASEAN Economic Bulletin, Dec 2003, and will be Chapter

12 in the PhD thesis)

Phan Minh Ngoc, Graduate School of Economics, Kyushu University

Nguyen Thi Phuong Anh, State Bank of Vietnam

Phan Thuy Nga, Graduate School of Economics, Hanoi National Economic University

Abstract: Employing different representative approaches and modern time series methods, this

study attempts to examine the prospective long-term relationship between exports and growth in

Vietnam during 1975-2001. The general conclusion of the study is that, despite the fact that the

export sector has been very robust in the last decade or so, as represented by the large and

increasing export share in the Vietnamese economy, there is no firm econometric evidence to

suggest that the export sector has imparted a dynamic contribution to other sectors of the

economy. The study also offers a number of explanations and discusses briefly some policy

implications with respect to the role of exports in economic development in Vietnam.

I. INTRODUCTION AND BACKGROUND

The purpose of this study is to examine the long-run impact of exports on GDP growth in

Vietnam in the period 1975-2001. As one of the poorest countries in the world with per capita of

still less than US$400 at the end of the 20th century, Vietnam is increasingly attracting the eyes

of development economists as a successful model of poverty reduction and remarkable

improvement in its economic performance, as a result of economic reform and restructuring

programs, in which the outward-oriented strategy has seemingly played a crucial role.

The contemporary economic history of Vietnam in the last quarter of the century began in

1975 when the country was unified, and the Soviet-style central planning system was applied to

the whole country for the first time. However, the economic system did not perform well, and,

as a result, the country faced several episodes of macroeconomic crisis in the period of 1976-

1985 (see Hoa (1997), Harvie and Hoa (1997)). This period also witnessed the experimentation

of import substitution characteristic of developing countries in the early period of

industrialization. The application of this policy led to the expansion of industries producing

consumption, inputs, and capital goods at the expense of the export sector.

It is noteworthy that right in the early 1980, two market-oriented reforms were tried within

the framework of a centrally planned economy. The first reform occurred in the agricultural

sector with the introduction of a contract system. The second reform was applied to state owned

enterprises with the introduction of the ‘three-plan system’ to provide some limited economic

freedom. Though short-lived, these limited reforms brought about tremendous effects on

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increasing production in the two sectors (see more in Riedel and Comer, 1998).

Nevertheless, not until 1986 did Vietnam implement a set of bold and far-reaching reforms

to open itself to the world and the region, and transfer its planned economy to a market-driven

economy. Of particular important reforms and policy changes have been one that promoted

foreign trade. The results were impressive. As it is clear from Table 1 below, all macroeconomic

indicators were significantly higher in the period of 1986 onward than in the period of 1975-

1985, with one exception being the average annual growth rate of population. The average

annual growth rate of GDP increased from 3.7% in 1975-1985 to 6.6% in 1986-2001. The

average annual growth rate of exports increased much more impressively, from 10.2% to 19.1%,

respectively. The average annual weighted growth rate of exports was substantially higher in

1986-2001 than in the period before (5.1% and 1.1%, respectively).1 As another indication of

export performance, the average annual growth rate of export share in GDP also increased

significantly from 7.3% in 1975-1985 to 11.2% in the next period. Since trade liberalization

allows the export sector to grow along the line of comparative advantages, it is reasonable to

assume a greater contribution of exports to economic growth in the period after 1986. Indeed,

many observers have agreed that increasing exports, along with increasing FDI and domestic

saving, have been central to high economic growth in Vietnam.

However, as can be seen from Figure 1, export growth was far more unstable than economic

growth. Exports followed a clear boom-bust pattern. There were several booms in the mid

1970s, the early and the late 1980s, and the mid 1990s, as well as several busts in the late 1970s,

the mid 1980s, the early and the late 1990s. In some contrast, the growth rate of economic was

low and even turned to negative during the Second Five Year Plan 1976-1980, due mainly to a

dismal performance of agriculture and the stagnant growth of the industrial output as a result of

efforts by the government to eradicate private industry and commerce in the south (1.9% and

0.6% on average in 1975-80, respectively).2 Other notable reasons were shortcomings in

management and leadership. The economy recovered moderately in the early years of the Third

Five Year Plan 1981-1985 owing to the government’s new economic policy and liberalization as

discussed above. Nonetheless, the effects of these measures were short-lived and could not

solve the deep structural problems of the economy. The economy went down again in the mid

1980s when the effects of stimulative measures wore off, and the economy was faced with

severe macroeconomic imbalances reflected in high and rising inflation.3 Economic growth was

fairly robust, albeit with some slight downturns, from 1986 onward as a result of reform

programs.

1 Calculated as , where represents export value, the growth of exports, and GDP level.2 For more details, see Riedel and Comer (1998).3 Riedel and Comer (1998) pointed out that the source of rising inflation in this period was the budget deficits of state-owned enterprises.

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Table 1 Selected Macroeconomic Data, 1975-2001Variables Pre-reform period

1975-85

Reform period

1986-01

Full sample

1975-01

Mean real per capita GDP (1999 US$ prices) 164 275.2 232.4

Mean exports/GDP ratio (%) 9.1 26.6 19.5

Average annual growth rate of GDP (%) 3.7 6.6 5.4

Average annual growth rate of population (%) 2.3 1.7 1.9

Average annual growth rate of exports (%) 10.2 19.1 16

Average annual weighted growth rate of exports* (%) 1.1 5.1 3.6

Average annual growth rate of export share in GDP (%) 7.3 11.2 9.7

Mean investment/GDP ratio (%) 11.1 21.8 17.5

Note: Figures in brackets are the standard deviations.

Sources: Vietnam General Statistical Office, various issues.

Note: data (in current US$ for export volume, and in current Vietnamese dong for GDP) are

converted into the 1999 US$ prices.

It is difficult to discern a pattern of growth behavior running from exports to output from

the overview of economic and export performance above. This raises a doubt about the

importance of exports in Vietnam’s economic development. The study’s operating hypothesis

therefore is that exports have been very limited in their impact on economic growth and

development in Vietnam in the long run.

II. EXPORTS AND GROWTH: A BRIEF LITERATURE REVIEW

The argument concerning the role of exports as a determinant of economic growth is

extremely old, going back to the classical school of thought, represented by Adam Smith who

believed in the importance of international trade to productivity improvements by expanding the

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size of markets thereby enabling the realization of economies of scale. Later, David Ricardo

indicated that if two countries trade with each other and specialize according to their

comparative advantages, both countries gain from trade. Other economists point out that, in

addition to this static gain, freer trade provides domestic firms access to a wide variety of

foreign inputs at a lower cost. Furthermore, to the extent that exports help increase the access to

foreign capital and technology via the greater availability of foreign exchange, as well as the

fact that FDI tends to concentrate in more open economies, expanding exports could lead to

higher rates of economic growth and more rapid economic development (see more, for example,

in Richards (2001) and references contained therein).

More recently, several seminal theoretical works, e.g., Rivera-Batiz and Romer (1991),

Feenstra (1990), Segerstrom et al. (1990), Grossman and Helpman (1991), and Baldwin and

Forslid (1996), have provided a framework to understand and analyze the relationship between

exports and economic growth. It is argued that expanding exports can raise total factor

productivity through their favorable effect on economies of scale and other externalities such as

technology diffusion, higher skilled labor and improved management skills, and capacity

utilization. Moreover, since an export-led development strategy does not discriminate against

exports in favor of the home market, it brings incentives for domestic resources closer to

international opportunity costs and hence closer to what will generally produce efficient

outcomes (Srinivasan and Bhagwati, 2001).

The vast empirical literature tends to affirm the importance of free trade for economic

development. Many cross-country studies, including Lopez (1991) and Edwards (1992),

demonstrate a strong and robust relationship between trade orientation and economic growth.

Voluminous analyses of country experiences in major OECD, NBER and IBRD projects during

the last few decades conclude that by engaging in free international trade, developing countries

could significantly improve their welfare and growth. (See an overview of the literature in

Harrison (1996), and Buffie (2001).) Spectacular economic performance in East Asia for several

decades now has shown convincingly that exports are an engine for growth in this region (see

particularly in World Bank (1994); Blomqvist (1997); Balassa (1978, 1985); Garnaut (1996);

Lal and Snape (2001); and Chow and Kellman (1993)).

Nevertheless, it should be noted that there are still some reservations in the literature

concerning the role of openness in economic development, as well as the direction of the causal

relationship between exports and economic growth. For example, Clarke and Kirkpatrick (1992)

pool data for 80 low- and middle-income countries for 8 years (1981-1988) to evaluate the

effect of trade policy reform on economic performance. They conclude that economic

performance does not benefit from trade reform strategies. In particular, Rodriguez and Rodrik

(1999) point out several weaknesses in recent empirical studies that strongly conclude in favor

of trade liberalization. Their study suggests a strong negative relationship in data between trade

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barriers and economic growth.

In addition, there is some evidence of threshold effects. Michaely (1977) uses a sample of

41 less developed countries for the period 1950-1973 and indicates that although there is a

statistically significant positive correlation between exports and economic growth, growth is

affected by export performance only once countries achieve some minimum level of

development. In a study of 53 non-oil developing countries, Sheehey (1992) points out that the

positive effect of the growth of exports share is only important for the more industrialized

countries.

Export composition also matters. It has been indicated that exports of manufactured

products are much less cyclically sensitive than exports of primary commodities. Therefore,

countries whose exports contain mainly the manufactured products suffer less from cycle

downturn or recovery, to the extent that their share in world markets for manufactures is still

small (Harrison (1996); and Srinivasan and Bhagwati (2001)). This view is supported by a

number empirical studies, including Greenaway et al. (1999), which constructed a panel of 69

countries and found that those developing countries that specialized in manufactured products

were more likely to benefit from export-led growth than those which specialized in food and/or

other primaries.

With regards the direction of causality between exports and economic growth, since exports

are a major component of GDP, causality may run from exports to growth or vice versa. A

sizeable empirical works, which studied several groups of less developed countries and/or

individual countries, such as Malaysia, Paraguay, and the Asian NICs (Korea, Taiwan, Hong

Kong, and Singapore), have found no conclusive evidence on the causal relationship between

exports and growth in these countries or groups. (See reviews of this literature in Richards

(2001), and Begum and Shamsuddin (1998).) Even in the case where there is a positive effect of

increasing exports on expanding production, such a positive effect may be limited and offset by

the increasing manufacturing imports displacing domestic production. This has been found, for

instance, by Ruiz-Napoles (2001) in the Mexican case over the period 1978-1994.

III. METHODS AND DATA

According to Sheehey (1990), there is a steady flow of research on the relationship between

exports and economic growth. This flow started with analyses on the bivariate correlation

between the two variables, treating a strong positive correlation between them as at least

suggestive of the benefits of the export promotion. This approach faces two fundamental

criticisms. First, since exports are a component of GDP, there is strong bias in favor of a

correlation between them. Second, such bivariate tests do not take into account the effects of

other relevant factors on economic growth.

To address these problems, several authors have tested the effect of exports on the economic

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growth in the following production function, which is referred to as the Balassa approach

(Sheehey, 1990).(1)

where, Y is the real GDP; K is the real capital stock, which is widely approximated by the ratio

of gross investment to GDP, I/Y; L is the labor force, which is approximated by population, and

X is merchandise real exports. The dot indicates annual percentage rates of growth. This model

is based on a hypothesis that marginal productivities are higher in export production due to the

scale effects and externalities associated with export production. Given the labor force and

capital stock, expansion of the export sector will raise GDP growth.

Another line of research attempting to deal with the criticisms above is originated by Feder

(1982), who views the economy as if it consists of two sectors, namely export and non-export.

Each of the two sectors’ outputs is a function of the factors allocated to the sector (the sector-

specific capital stock and labor employment). In addition, the non-export sector output is

dependent on the volume of exports produced. The inclusion of exports as a variable to explain

growth is expected to capture the positive production externalities of the export sector. Feder’s

theoretical framework is represented in the following form, which is referred to as the Feder

approach by Sheehey (1990).

(2)

where L and I are total labor employment and total investment in the economy, respectively. Y

stands for GDP and X for exports. The dot indicates the annual growth rate. is

the sum of the productivity differential and the production externalities. The term

represents the weighted export growth.

It should be stressed that results of studies that employed the Balassa approach and Feder

approach are still biased by a built-in correlation between exports and GDP.4 Sheehey (1990)

indicates clearly that not only exports but also all major production categories are directly

correlated with GDP growth. In another paper, Sheehey (1992) substitutes, alternatively, the

share of exports in GDP and the rate of growth of this ratio for export growth as measures of

outward orientation in the following equation, which we refer to as the Sheehey approach.

4 According to Sheehey (1990), ‘the Balassa approach assumes that developing countries are typically on their production possibility frontiers and that resources for the expansion of one sector must be taken away from some other sectors’ (p. 115). However, as Sheehey points out, this is not always the case, if the expansion of a sector is instead due to policies that put previously unemployed resources to work. In the Feder approach, Sheehey maintains that, to the extent that the growth of labor and capital inputs are only poorly measured by the variables used, the strong links between sectoral rates of growth and that of total GDP are due to the built in correlation between GDP and its major components.

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(3)

where, with a dot representing annual growth rate, Y is GDP, I/Y is the ratio of gross domestic

investment to GDP, L is the labor force, and EX is the export variable, measured in turn by the

share of exports in GDP and the rate of growth of this ratio.

Considering the study’s operating hypothesis on the limited impact of exports on economic

growth and development in Vietnam, the study will first examine the relationship between

exports and GDP growth using the simplest form of test – bivariate correlation – among the four

forms of tests presented above. The aim is to see if there is a close link between the two

variables in the case of Vietnam, given the bias towards a strong correlation between them in

such a test. The study will next employ in turn more complicated approaches introduced above

(equations 1-3), which are frequently used to test the export promotion hypothesis elsewhere in

other cases, to examine the effects of exports on economic growth in Vietnam.

Finally, the Granger-causality test is employed as a supplementary tool to verify the key

finding from our growth models, given the limitations of the Granger-causality test and the

small size of our sample.5 These tests are conducted in the following equations, following

Richards (2001) and others (see Richards (2001) for more references in this regard).

(4)

(5)

where EGR indicates economic growth, measured alternatively by the growth rate of GDP

(GRY) and the growth rate of GDP net of exports (GRY2); and EX indicates export orientation,

measured in turn by export growth (GRX), export share (XSH), the growth rate of export share

(GRXSH), and the weighted growth rate of export share (WGRXSH). In addition to the two

variables GRY and GRX, which are widely used in the Granger-causality test to examine the

causality and direction of the causal relationship between exports and growth in much of the

literature, the variables GRY2, XSH, GRXSH, and WGRXSH are employed to address the

concern about the built-in correlation between exports and economic growth.

Before conducting the test, the dependent and independent variables are regressed on their

own lagged values. Additional lag values of variables are added one at a time up to a maximum

of four lags.6 The lag value is chosen as optimal that minimizes the Akaike information criteria

(AIC). Having determined the optimal lag lengths for dependent and independent variables, we

add lagged values of the independent variables to the model up to a maximum of four lags. If

this reduces the AIC then we conclude that the independent variable cause the dependent

5 Note that this test is a test of precedence, which does not necessarily imply for a test for economic causality.6 This is, as Richards notes, arbitrary and dictated by a concern for limited degrees of freedom in the time series.

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variable.

To determine the direction of the causal relationship between exports and economic growth,

following these same authors, we take the sum of the signs on the coefficients attached to the

independent variables of the two estimated equations. If >0 (<0) then it is concluded that

export growth causes economic growth to increase (decrease). If >0 (<0) then we

conclude that economic growth causes export growth to increase (decrease). A conventional F

test is conducted to test the joint significance of the coefficients.

Data used in this study are annual data for the period 1975-2001. Data for GDP, exports,

investment, and part of data for population – the proxy of labor force – are obtained from

General Statistic Office’s Statistical Yearbook (various issues). The remaining data for

population are obtained from various issues of UNDP’s Statistical Yearbook for Asia and the

Pacific, and ADB’s Key Indicators of Developing Asian and Pacific Countries.

IV. EMPIRICAL RESULTS

Results from bivariate correlation tests

Table 2 shows the results for alternative correlation between exports and growth. The

second and third columns report correlation coefficients for period 1975-85 and 1986-2001

respectively. The last column presents results for the full sample.

Table 2 Correlation Results for Exports and GDPCorrelation

No.

Variables Pre-reform period

1975-1985

Reform period

1986-2001

Full sample

1975-2001

1 Y and X 0.814* 0.992* 0.984**

2 GRY and GRX 0.504 0.151 0.369

3 X and Y2 0.725* 0.941** 0.918**

4 Y and XSH 0.509 0.971** 0.981**

5 GRY and WGRX 0.537 0.328 0.43*

6 GRY and GRXSH 0.368 0.06 0.243

Notes: * and ** imply the 5% and 1% levels of significance, respectively. X stands for exports, Y for

GDP, Y2 for GDP net of export, XSH for the share of exports in GDP, GRY for the growth rate of GDP,

GRX for the growth rate of exports, WGRX for the weighted growth rate of exports, and GRXSH for the

growth rate of export share in GDP.

We first correlate export level (X) with GDP level (Y), as in correlation 1; the correlation

coefficients between the two variables are constantly very high and statistically significant

throughout the periods studied. However, the correlation coefficients between the growth rate of

GDP (GRY) and the growth rate of exports (GRX) are much lower and statistically insignificant

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at the standard level of 5% (correlation 2). If we substitute non-export output (Y2) for Y to

reduce the bias towards a correlation between Y and X, the correlation coefficients between X

and Y2 are still of high order and statistically significant at 5% or less (correlation 3). If export

orientation is represented by the share of exports in GDP (XSH), then the correlation

coefficients between Y and XSH are very high and statistically in the periods 1975-2001 and

1986-2001, but not in the period 1975-1986 (correlation 4). If the weighted growth rate of

exports (WGRX) and the growth rate of export share in GDP (GRXSH) are used instead of the

growth of exports (GRX), the correlation coefficients between GRY and GRXSH, and between

GRY and WGRX are low and, in most cases, statistically insignificant, with the exception being

the correlation between GRY and WGRX in the full sample 1975-2001 (correlations 5 and 6). It

should be noted further that the correlation coefficients between GRY and GRX, between GRY

and WGRX, and between GRY and GRXSH for the 1986-2001, when export promotion policy

was followed, are greatly smaller than those in the previous period, when import-substitution

policy was followed (see the second and third columns of Table 2). In short, despite the strong

bias in favor of correlation between exports and growth, the mixed results in Table 2 do not

provide any firm conclusion regarding the link between them in Vietnam.

In search for more conclusive evidence, in what to follow we shall estimate the impact of

exports on GDP growth in equations 1-3. However, before beginning our analysis, in order to

avoid the error of spurious regression we need to run a test (the augmented Dickey-Fuller test,

or the ADF test) for the time series data’s stationarity characteristics. The ADF test shows that

GRY, XSH, WGRX, the growth rate of population, which is a proxy for the growth rate of labor

force (GRL), and the ratio of gross domestic investment to GDP (I/Y), which is a proxy for

capital stock, K, are nonstationary. The common approaches for dealing with nonstationary

variables are as follows (see, for example, van den Berg and Schmidt (1994)).

* When all variables in a regression model are integrated of order one (denoted I(1)), the

variables are differenced prior to estimation. If the variables are not cointegrated, then

consistent estimates of the model can be obtained. It should be noted that the coefficients must

be interpreted as short-run effects of the independent variables on the dependent variable.

However, instead of first differencing, in the present study we shall employ the Hodrik-Prescott

(HP) filter, a stochastic detrending procedure that has received much attention in recent years

(see, for example, Doroodian (1999) and references contained therein), to transform these data

before using them in our analysis.7

7 Technically, the HP filter is a two-sided linear filter that serves as a sensible compromise between the extremes of simple linear detrending and first differencing. It chooses to minimize the variance of a stochastic process

around a trend as follows: .

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* If the variables, which are I(1), are cointegrated, then ordinary least squares (OLS)

estimates of the parameters will be consistent in an error-correction model (ECM), which allows

simultaneous description of the short-run and long-run characteristics of the relationships

between the dependent and independent variables.

Results from the Balassa approach

As mentioned above, three of the four variables in equation (1), namely, GRY, GRL, and

I/Y, are nonstationary. The Johansen cointegration test shows that the hypothesis that these

variables are cointegrated is rejected at the 5% level of significance. Therefore, we can estimate

equation (1) by OLS after using the HP filter to transform the nonstationary variables. The

computational results appear below.

GRY= –1.201 + 0.355I/Y + 9.221GRL + 0.075GRX (6) (-0.186) (2.024) (1.22) (2.523)

( = 0.221. The figures in brackets are t-values)

The results in equation (6) illustrate that the impact of exports on economic growth is

statistically significant, but economically insignificant, with the coefficient of exports being

very small (0.075). Putting aside Sheehey’s argument about the built-in correlation between

exports and growth, it is clear that exports has a very limited impact on growth in the case of

Vietnam, in particular in comparison with that found in some representative studies. Such a

comparison is presented in Table 3 below.

Results from the Feder approach

The ADF test conducted above shows that all four variables in equation (2) are

nonstationary. The Johansen cointegration test indicates one cointegrating equation at the 5%

level of significance, implying a long-run relationship between the variables. Such a

relationship can be represented with an ECM. To build that ECM, following van den Berg and

Schmidt (1994), we first rewrite (2) as (7)

Equation (7) expressed in first difference is

(8)

(Note that (known as the error-correction term) ; has zero mean and finite

variance; is the error-correction coefficient).

An ECM like (8) can be augmented to include lags of the differenced variables and level

terms to estimate both short-run and long-run effects of the independent variables on the

( ) is therefore the filtered series, the residuals, which are stationary. The larger the , the smoother the . As 0, the linear trend results (Eviews 3.1).

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dependent variable. The optimum order of the lagged value for GRY and WGRX is 2, and 1

for (I/Y) and GRL.8 Level terms enter (8) after substituting for from (7). Finally, (8)

becomes

(9)

Parameters , , and in (7) can now be recovered from parameter estimates of (9). More

specifically, , , and where , and .

We apply the OLS estimator to estimate (9). The OLS results are

(0.762) (2.303) (0.115) (0.363) (0.088)

(10)

(1.675) (0.532) (1.122) (0.444)

(0.534) (-2.211) (0.924) (-0.666) (-0.23)

( = 0.132. The figures in brackets are t-values)

As seen from the error-correction model (10), the level coefficient of WGRX is negative

and statistically insignificant. This means that there is no significant long-run relationship

between exports and growth. Note that the coefficients of the differenced WGRX (both lag 1

and lag 2) representing short-run effects of exports on growth are positive but jointly

statistically insignificant.

Results from the Sheehey approach

In this approach, the share of exports in GDP (XSH) and the growth rate of export share in

GDP (GRXSH) are employed to measure export orientation instead of the growth rate of

exports (GRX). For the regression that involves XSH, the Johansen cointegration test indicates

that the four variables in this regression are cointegrated. Employing the same method

mentioned above, the following ECM is estimated with the corresponding results shown.

(1.003) (2.667) (0.381) (0.192) (0.033)

(11)

(0.929) (0.898) (0.587) (-0.308)

8 Lag length selection is determined by the Akaike information criterion.

11

(0.068) (-2.444) (0.316) (-0.909) (-0.663)

( = 0.139. The figures in brackets are t-values)

The results in (11) also clearly indicate no significant long-run relationship between exports

and growth.

The second regression in the Sheehey’s approach involves GRXSH, which is stationary. As

we have found no cointegration between the nonstationary variables, namely GRY, I/Y and

GRL, we apply the OLS estimator to estimate the following equation (after using HP filter to

transform the nonstationary data) with the corresponding results shown.

GRY= –0.677 + 0.388I/Y + 7.248GRL + 0.07GRXSH (12) (-1.23) (2.144) (0.94) (2.129)

( = 0.168. The figures in brackets are t-values)

Equation (12) shows that although the coefficient of GRXSH is statistically significant, it is

too small (0.07) to allow us to conclude that exports have an economically significant impact on

growth. This can be clearly illustrated from the following comparison (Table 3).

Table 3 Estimated Effects of Exports on Economic GrowthStudy Nature of the Study Coefficient of Exports in

Models of GDP growth

Sheehey (1990) A cross-sectional analysis of 36 developing

countries, 1960-70

0.18a

0.85b

Kavoussi (1984) A cross-sectional analysis of 73 developing

countries, 1960-78

0.105a

Ram (1985) A cross-sectional analysis of 73 LDCs, 1970-77 0.148a

Balassa (1985) A cross-sectional analysis of 43 developing

countries, 1973-78

0.161a

Tyler (1981) A cross-sectional study of 55 middle-income

LDCs, 1960-77

0.570a

Van den Berg and

Schmidt (1994)

A time series analysis on 17 Latin American

economies, 1960-87

In the range of

0.051a - 0.332a

Feder (1982) A cross-sectional study of 31LDCs, 1964-73 0.422b

Begum and

Shamsuddin (1999)

A time series study on Bangladesh, 1962-92 0.957b

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Ram (1987) A study of 88 developing countries, 1960-82 1.552b

Greenaway and

Sapsford (1994)

A time series study on Pakistan, 1971-85 1.971b

Sheehey (1992) A cross-sectional analysis of 53 non-oil developing

countries, 1960-70:

- Full sample 0.537c

- 20 more industrialized countries 1.267c

Present study A time series study on Vietnam, 1975-01 0.075a

0.07c

Notes: a The coefficient of the growth of exports; b the coefficient of the weighted growth rate of exports; c

the coefficient of the growth rate of export share in GDP.

Sources: Adapted from Begum and Shamsuddin (1999), and Sheehey (1990, 1992).

Dealing with problems of structural changes and simultaneity bias

As discussed above, Vietnam's economy underwent some very large structural changes in

the late 1980s. These changes need to be captured in our econometric analysis. However, the

small sample size makes it impossible to disaggregate the data series into two pre- and post-

break sample. As a second-best option, the convention is to use a dummy variable for different

periods and/or a slope dummy variable, which are expected to partially capture the effects of

these changes, in models like (1) or (3).9 (See Richards (2001) and Begum and Shamsuddin

(1998) for a detailed description of the method.) It is shown that the models perform very badly

with the inclusion of these dummies, and none of the coefficients are statistically significant.

This suggests that the structural changes do not significantly affect our analyses.10

On the simultaneity issue, the Hausman specification test is conducted to examine whether

or not the growth models mentioned above is subject to simultaneity bias. Following Begum

and Shamsuddin (1998), we conduct this test in two steps. In the first step, export variable is

regressed on an instrumental variable, which determines the demand for exports, and the

remaining exogenous variables of the models.11 In the second step, estimated residuals from the

first step are added to the models, and the augmented models are estimated by OLS. It is found

that the estimated coefficients of export variables in the models are not statistically significant at

9 For model (3), these dummy variables are added only in the regression that involves GRXSH.10 Results of these estimates and other non-reported results are available upon request. 11 Here we use the annual growth rate of world income, collected from various issues of the International Financial Statistics, IMF, as the instrumental variable.

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the 5% significance level, indicating that GDP growth has no contemporaneous influence on

exports. Put differently, the impact of exports on growth is not subject to simultaneity bias.

Results from Granger-causality tests

We now turn to conduct the Granger-causality test to examine the possibility that GDP

growth has some non-contemporaneous effect on exports, which cannot be detected by the

Hausman test. In addition to the earlier ADF test results, which show that GRY, WGRX, and

XSH are nonstationary, the ADF test for GRY2 indicates that this variable is also nonstationary.

After applying HP filter to obtain stationary series data, we estimate eight separate versions of

the Granger-causality model, as depicted in Table 4 below.

Table 4 Granger Causality Tests ResultsModel 1: GRY XSH XSH does not cause GRY(4)

GRY does not cause XSH(2)

Model 2: GRY2 XSH XSH does not cause GRY2(4)

GRY2 does not cause XSH(2)

Model 3: GRY GRX GRX(4) causes GRY(4)= –0.048. Test of the restriction = 0 is rejected at 1%.

GRY does not cause GRX(2)

Model 4: GRY2 GRX GRX does not cause GRY2(4)

GRY2 does not cause GRX(2)

Model 5: GRY GRXSH GRXSH does not cause GRY(4)

GRY does not cause GRXSH(2)

Model 6: GRY2 GRXSH GRXSH does not cause GRY(4)

GRY2 does not cause GRXSH(2)

Model 7: GRY WGRX WGRX does not cause GRY(4)

GRY does not cause WGRX(2)

Model 8: GRY2 WGRX WGRX does not cause GRY2(4)

GRY2 does not cause WGRX(2)

Note: * Figures in brackets are the number of lag values as determined by the AIC for each model.

As Table 4 shows, in all but model 3 the null hypothesis that export growth does not

Granger-cause is not rejected. Furthermore, in model 3, as <0, we can conclude that

export growth causes economic growth to decrease. This finding suggests that farther from the

paper’s operating hypothesis, export growth in Vietnam has had a long-term negative impact on

14

the country’s economic development.

VI. SOME EXPLANATIONS

The mixed empirical results in the proceeding section cast doubt on the argument then that

the export sector in Vietnam plays a leading role in generating sustainable economic growth.

Given the large share of exports in the economy and the a priori importance of exports in

economic development, this conclusion is somewhat surprising. In this section, we shall try to

offer some explanations to support our econometrical evidence as follows.

1. The possibility of poor quality of the data

Table 5 reports a small sample of data on exports and growth for Vietnam from 1987-1997.

As can be seen, the data differ to a great extent across the available sources. Most of the relevant

data used in the present study are obtained from Vietnam’s General Statistical Office (GSO)

because consistent data for all variables in years before 1986 can be obtain only from this

source. Nevertheless, it is noteworthy that estimates such as GDP growth by the IMF and the

World Bank are often lower than those released by the Vietnamese authorities. The possibility of

poor quality of the data that have affected our analysis therefore cannot be perfectly ruled out.

Table 5 Data on Exports and GDP from Different SourcesGDP at constant prices of 1994 (dong bn)

Source 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

GSO 113154 119960 125571 131968 139634 151782 164043 178534 195567 213833 231264

WDI 24888 26166 28093 29526 31286 33991 36735 39982 43797 47888 51791

UN 25321 26835 28093 29526 31286 33991 36735 39982 186499 203919 221872

Exports at current prices (US$ mn)

GSO 854.2 1038.4 1946 2404 2087.1 2581 2985.2 4054.3 5448.9 7255.9 9185

WDI 2200 1003 1500.9 1709.8 3133.4 3199 3622 5342.8 7330.4 10103 12026

UN 854 1038 1946 2404 2087 2581 2985 4054 5449 7256 8900

Notes and sources: GSO –General Statistic Office, Statistical Data of Vietnam Socio-economy 1975-2000;

WDI – World Development Indicators 2001, CD-ROM, the World Bank; UN – Statistical Yearbook for

Asia and the Pacific 1998, the United Nations.

2. Export structure

Vietnam’s export structure might be another explanation. Exports have grown at about 19%

annually since 1986, but the export structure has changed very slowly over the years. The export

structure has consisted of a major proportion of agricultural and mineral products, neither of

15

which rests on a sufficiently strong resource base to be sustainable in the long run (Riedel,

1997), though lately there has been evidence of export diversification with more emphasis on

manufactured exports. Ten largest export commodities and changes in their ranks in total

exports during the last decade are shown in Table 6 below.

Table 6 Ten Largest Export Commodities and Their Ranks in Total Exports (US$ mn and %)

(figures in brackets are share in total exports)Rank

1990 1996 1999 2000 2001 9

0

9

6

0

0

0

1

Crude oil 390 (16.2) 1346 (18.6) 2092 (18.1) 3503 (24.2) 3126 (20.8) 1 1 1 1

Textile and garments 25 (1.0) 1150 (15.8) 1747 (15.1) 1892(13.1) 1975 (13.1) 4 2 2 2

Aqua products 220 (9.2) 651 (9.0) 971 (8.4) 1479 (10.2) 1778 (11.8) 3 4 3 3

Footwear 530 (7.3) 1392 (12.1) 1472 (10.2) 1560 (10.4) 5 4 4

Electronics 788.6 (5.4) 595.6 (4.0) 5 6

Rice 272 (11.3) 855 (11.8) 1025 (8.9) 667.8 (4.6) 624.7 (4.2) 2 3 5 5

Coffee 25 (1.0) 337 (4.6) 585 (5.1) 501.4 (3.5) 391.3 (2.6) 7 6 7 7

Wood products 294.2 (2.0) 335.1 (2.2) 8 8

Fine art products 20 (0.8) 124 (1.7) 168 (1.5) 237.1 (1.6) 235.2 (1.6) 8 9 9 1

0

Fruits and vegetables 52.3 (2.2) 90 (1.2) 105 (0.9) 213.1 (1.5) 330 (2.2) 5 11 1

0

9

Cashew 130 (1.8) 110 (1.0) 167.3 (1.2) 151.7 (1.0) 8 11 1

3

Rubber 16 (0.7) 163 (2.2) 147 (1.3) 166 (1.1) 166 (1.1) 9 7 1

2

1

2

Pepper 12 (0.5) 65.5 (0.9) 137 (1.2) 145.7 (1.0) 91.2 (0.6) 1

0

1

2

1

3

1

5

Coal 38 (1.6) 115 (1.6) 96 (0.8) 94 (0.6) 113.3 (0.8) 6 1

0

1

4

1

4

Dairy products 80.4 (0.6) 187.7 (1.2) 1

5

11

Total exports 2404 7256 11541 14483 15027

Share of primaries &

agriculture products

listed above in total

42.6 51.7 45.6 49.9 47.3

16

exports

Share of the ten largest

items in total exports

52.4 74.4 72.6 76.3 72.9

Source: Adapted from Dung (2002).

As depicted in Table 6, primaries and agricultural products, such as crude oil, aqua

products, rice, coffee, fruits and vegetables always appeared in the list of the ten largest export

commodities during the last decade. These products accounted for almost 50% of total exports

throughout the period, and no sign of decrease in their share can be observed.

Three major manufactures that had high ranks in the list are garments, textile, and footwear,

accounting for more than 23% of exports since 1996 (note that footwear was exported only from

1996. Note further that, as analyzed below, these manufactures are very low value-added).

Together, the ten largest items accounted for more than 70% of total exports. Again, the share of

the ten largest items does not appear to have decreased, if not to say increase, over the last

decade. Other less significant items are also primaries and agriculture products, such as cashew,

tea, rubber, and coal. In short, what we can observe from Table 6 is that Vietnam relies heavily

on exports of primaries and agricultural products, as well as other low-value added ones, and the

export structure has changed very slowly,12 particularly in comparison with other East Asian

countries in their early stage of development in the 1970s and 1980s. 13 The problem would

become more acute if we extend our surveyed period as far as the 1980s. We would certainly

observe that indeed the last two decades witnessed no significant change in the export structure

in Vietnam.14

Furthermore, if one notes that prices for Vietnam’s major unprocessed export commodities

tended to decrease sharply from the second half of the 1990s (see various issues of the World

Bank and ADB on the Vietnamese economy), one would have to be very concerned about

possible negative effects of continually increasing exports of such commodities on the economy

12 It should be stressed that exports of electronics with relatively significant scale appeared in the list only from 2000.13 For example, Thailand was able to reduce agricultural share in its exports from 53.6% in 1981 to 26.9% in 1991, machinery manufacture share increasing from 5% to 23.8%, other manufactures (mainly light industrial products) share from 25.3% to 39.3%, respectively. Indonesia in the same period was able to significantly reduce its dependence on export of mineral fuels (a majority of it was oil), from 79.8% to 38.3%. Other manufactures share increased remarkably from 4% to 36.7% (EAEP, 2001).14 The export structure in 1986, for instance, was: agriculture products 46,4%, mineral and fuels 23.3%, manufactures 29.1% (EAEP, 2001).

17

in that context.15 Increases in production and exports of these commodities in the time the world

demand for them declines obviously do not mean increases in economic welfare and

development for the country.

As has been pointed out in our literature review, the nature of a country’s exports is

important in determining whether trade expansions are likely to accelerate growth. Needless to

repeat the contention among economists and observers that the dynamic contribution from the

export sector to other sectors is likely to be derived from manufacturing than from primary

production activities (see, for example, Richards (2001)). Thus, it can be safely concluded that

Vietnam’s export structure has very likely hindered the export sector in contributing to

economic growth.

3. Weak backward linkages

There are several points to make hear. First, Vietnam failed to create a network of efficient

industries that directly serve export-oriented production activities. Take the rice production and

export as an example. Due to lack of rice processing facilities, a vast majority of Vietnamese

rice are exported unprocessed or poorly processed. The result is that Vietnamese rice’s price is

always 15-20% lower in world markets than that of Thailand, one of its major rivals. This is

also the case for coffee, vegetables, and aqua products, and a range of others. It is estimated that

services (such as printing, packaging, and transportation) account for only 5 to 10% of export

value. Lower export prices would mean greater costs for Vietnam in terms of resources to be

sacrificed in order to maintain export growth and income level.

Second, the impressive performance of a number of Vietnam’s major export commodities

can be very misleading. Indeed, many observes and policymakers seem to have ignored, or been

unaware with the fact that these export commodities are strikingly low value-added. The

representative cases are garments and footwear. It is reported that imported materials and

additives account for about 80% and 75% of export values of the two commodities, respectively.

Value-added in such commodities is mainly in the form of low wages paid to workers in those

industries, which are the cheapest in East Asia (US$ 0.18 per hour; see Tuan and Hung (2000)).

Moreover, in the garment industry, due to the fact that production is taken mainly in the form of

subcontracting, almost all profits go to overseas contractors and material suppliers. As an

illustration, Vietnam can earn merely 5% of a shirt’s profit it exports. More severely,

subcontracting prices tend to decline by 15-20% per year squeezing further the producers’

earnings, while wide fluctuations in imported input prices represent another problem for them.

15 The rice price increased from US$180 per tonne to US$273.4 in 1995, and then declined sharply to US$161.9 in 2000 (Dung, 2002). The coffee price of also declined by more than half between 1999-00. According to Huy (2002), agricultural terms of trade of Vietnam have been on gradually declining trend, to less than 60 in the latter half of the 1990s as compared to the early 1980s.

18

The current capacity of domestic supply of some of these inputs can meet only 15% as much of

the demand (see Vietnam Economic Review, No. 8 (96), 2002). So if the problem of value-added

is taken into consideration, the real contribution of these exports to growth would have been

much less than what their face values seem to have shown. These facts would certainly cast

further doubt on the argument then that the export structure has changed drastically. Also, it may

therefore become necessary for the government to adjust its industrial and trade policy so as to

sufficiently develop industries such as processing industries and those industries that produce

materials as intermediate inputs for Vietnam’s highly competitive manufactures like garments

and footwear, instead of excessively investing in inefficient import-substituting, capital-

intensive industries such as cement, steel, and fertilizers as witnessed currently.

4. Weak linkage between export promotion and industrialization

This point relates to the previous points. Unlike the economies of newly industrializing

countries and most of the ASEAN countries, where economic growth was, as argued by Chow

and Kellman (1993), associated with and ‘driven’ by the twin processes of industrialization and

export expansion, the Vietnamese economy has been transformed towards industrialization very

slowly. Although statistical data on agricultural GDP, industrial output, and industrial GDP

shown in Tables 7 and 8 seem to support to a certain extent the otherwise argument, there are

several facts that should be taken into account. First, the growth rates of production and export

in mining industry on average outpaced those of others, due mainly to oil exploration

activities.16 It should be noted that the industrialization strategy relying too much on oil

exploration is often unsuccessful. Nigeria and Venezuela are good examples of this failure.

Table 7 Growth of Industrial GDP and its Share in GDP (%)1986 1990 1993 1995 1996 1997 1998 1999 2000

Agriculture GDP -1.1 (35.7) 1 (31.8) 2 (28.9) 6.9 (26.2) 3.3 (25.1) 3.4 (24.2) 4.8 (23.7) 4.4 (23.8) 4.3 (23.2)

Industrial GDP 11.3 (20.4) 2 (19.1) 8.5 (21) 13.4 (22.5) 11.2 (23.4) 12 (24.5) 14 (25.8) 14 (26.9) 13 (27.9)

Mining and quarrying 5.1 (1) 53 (3.5) 26 (4.6) 12.1 (5.3) 15.9 (5.5) 21.0 (5.8) 13.5 (6.2) 13.6 (6.7) 13.2 (6.6)

Manufacturing 11.6 (17.9) -6.3 (14) 6 (14.8) 13.7 (15.5) 9.5 (16.1) 9.3 (16.8) 14 (17.5) 13.6 (18) 12.8 (19.1)

Electricity, gas, water 11.9 (1.6) 5.1 (1.6) -4.5 (1.6) 14.2 (1.7) 14.6 (1.9) 9.2 (2) 18.5 (2.1) 17.8 (2.2) 14.7 (2.2)

Sources: Statistical Yearbook, various years.

Notes: Constant prices 1989 for 1986-95, and 1994 for 1995-00; figures in brackets are share in total

GDP.

16 Until now, Vietnam has no oil refinery. All crude oil produced is therefore exported, and all refined oil products must be imported.

19

Table 8 Growth and Structure of the Industrial Sector (%)1986 1990 1993 1995 1996 1997 1998 1999 2000

All industries na na 12.1 9.5 14.2 13.8 12.5 11.6 15.7

Mining and quarrying (1.6) (5.6) (16.4) 13.5 (13.5) 15 (13.5) 15 (13.6) 15 (13.4) 16.4 (14.6) 7.8 (13.6)

Crude oil and gas na na na 13.6 (10.5) 15 14 (10.6) 18.5 (11) 22 (12.2) 6.5 (11.2)

Manufacturing na na (77.2) 14 (80.5) 13.8 (80) 13.6 (80) 12.1 (79) 10.8 (79) 18 (80.5)

Garments & textiles (16.2) (10.4) (8.8) 19.9 (8.8) 15.3 (8.8) 27.2 (8.6) 7.9 (8.6) 11.8 (8.1) 14.5 (7.9)

Leather products (1.2) (1.5) (0.6) 20.8 (3.5) 25.2 (3.5) 48 (4.9) 7.1 (4.7) 9.1 (4.6) 15.7 (4.6)

Food and foodstuff (27.1) (28.7) (33.6) (31) (30.5) (30) (29.2) (28.8) (28)

Sources: Statistical Yearbook, various years.

Notes: Constant prices 1989 for 1986-95, and 1994 for 1995-00; figures in brackets are share in total

industrial output.

The second fact is that the shares of textile, garments, footwear, food and foodstuff in the

industrial sector were largest compared to other industries. They continued to remain very high

(totally more than 40%) and even increased in some years. It has been pointed out above that

not only that textile, garment, and footwear industries are very low value-added, they also use

simple and labor-intensive technology. Furthermore, a majority of workers in these industries

are unskilled coming from rural areas and often receive a 3-month training course at best or are

trained only on the job. With regards food processing industry, it is reported that 62% of firms in

this industry have less than 10 workers, with tiny fixed investment, using simple technology and

equipments. As a result, product quality is always a problem, and many products cannot even

compete with imported goods in the domestic market. Son (2000) gives an example on the

quality problem: due to limited processing capability, only 2% of Vietnam’s exported coffee

was classified as first grade. It is therefore hard to be convinced that increased production and

exports in these industries have contributed significantly to the country’s industrialization

process, in spite of their large share in total industrial output and export value.

Third, as mentioned in our literature survey, exports are believed to assist the country’s

industrialization in the sense that they generate exchange earnings needed to import advanced

technology embodied in capital goods.17 Exports are also said to promote technology transfer by

indirect link through greater contact with the outside world. Unfortunately, after 15 year of

renovation, the country’s general technological level is still very low. Reports on this regard

show that, for example, technological competence in electronics industry, a relatively modern

17 However, the fact is that the balance of payments constraint does not appear to have been improved at all. The current account balance deteriorated severely in 1990-97, reaching almost 10% of GDP in 1996. From 1998, due to a set of bold measures adopted to contain imports, the current account deficit was less pronounced (see data in EAEP, 2001).

20

industry in Vietnam (whose export ranked the 5th and the 6th in 2000 and 2001, respectively; see

Table 6) is 20 years behind that of other regional countries on average (for a detailed survey of

the current situation of the country’s technological competence, see Trung and Chi, 2002).18

As a vicious circle, the country’s backward industrial sector helps shape the export structure

that is dominated by primaries, agricultural products, and low-value added labor-intensive

products. In turn, such an export structure does not create sufficient stimulation to the country’s

industrialization process. Here, biased trade and industrial policies must be counted as a main

factor responsible for the low level of industrialization in the country and the failure to break

this vicious circle.

In summary, although Vietnam is said to have adopted the export-oriented industrialization

strategy followed by all of its successful neighbors (Riedel, 1997), it has failed to promote

simultaneously exports and industrial development. In other words, Vietnam has not been

successful in adopting export-oriented policies to stimulate its economic growth and industrial

development, while other countries, such as the Asian NICs, were extremely successful in their

early period of development (Chow and Kellman, 1993).

5. Excessive trading partner concentration

One may have been aware with the well-established proposition in the literature that small

economies such as Vietnam are affected by the growth of their trading partners. Indeed,

excessive trading partner concentration in Vietnam seems to have been associated with great

costs. Table 9 shows that about 50% or more of Vietnam’s exports were shifted to the Soviet

Union and the communist block in Eastern Europe, and about 70% of its imports coming from

these markets at the end of the 1980s.

Table 9 Directions of Exports and Imports (%)Exports Imports

18 On the argument on the role of exports in promoting technology transfer, see Buffie who (2001) dismisses part of the argument by pointing out that foreign exchange for the import of machinery embodying advanced technology will not be more readily available under an export-oriented than an import-substituting trade regimes. More importantly, he points to the fact that the mechanism through which exports are supposed to raise productivity growth is not modeled explicitly. He observes that some sort of rationale is usually given for including the export variable, but the connection between theory and empirical specification is quite loose. Moreover, while the role of trade in facilitating technology transfer is generally recognized, it does not necessarily mean that free trade enhances productivity growth, and hence higher growth. It is likely that comparative advantages of developing countries lie in traditional sectors with slow growth. Free trade could trap their production in such sectors and thus lead to a lower rate of productivity growth (Choudhri and Hakura, 2000).

21

1989 1996 1998 2000 1989 1996 1998 2000Total 100 100 100 100 100 100 100 100Asia 34.2 72.4 58.5 58.8 11 77 76.3 82.1

Japan 13.4 21.3 16.2 18.5 4 11 13 15ASEAN 12.1 24.5 21.6 20.3 2 27 27.5 28.9

Korea 1 7.7 2.4 2.8 1 16 12 12 Taiwan 0 4.3 7.2 5.4 0.0 11 12 13 Hong Kong 4 4.3 3.4 2.4 4 7 5 4.6 China 0 4.7 47.4 7.9 0.0 3 4 7.4Europe 45 16.2 27.9 26.8 67 14 13.1 12.4 Western Europe 5 -- -- -- 3 -- -- -- Germany 0 3.1 5.9 5.4 0.0 3 4 2 France 4 2 3.2 3 2 4 3 2.5 Britain 1.7 3.6 4 0.0 1 -- 0.9 Eastern Europe 40 -- -- -- 64 -- -- -- Russia 28 1.2 1.3 0.7 60 2 -- 1.5 America 0.0 4.1 7.0 5.8 0.0 2.7 3.2 3 USA 0.0 2.8 5.0 4.9 0.0 2.2 -- 2.6Others 20.8 7.3 6.6 8.6 22 6.2 -- 2.5

Sources: United Nations, Yearbook of international trade statistics, 1998, ADB (2001), and

Vietnam’s Statistical Yearbook, various years.

The sudden collapse of the Soviet Union and East Europe communist block in 1989-1991

represented a real blow to the Vietnamese economy, as abrupt changes in exports and imports

severely affected many domestic industries. The growth rate of GDP, especially trade volume in

this period declined sharply (see Figure 1). Since then, Vietnam’s trade direction has been

shifted to East Asia; trade with major trading partners in this region, such as Japan, ASEAN, and

the NICs accounted for almost 70% of total trade in the 1990s. Again, this excessive

concentration appears to have been one of the major reasons behind Vietnam’s economic slump

from 1998 when the effects of the Asian economic crisis was felt.19

6. Inefficient allocation of resources to the export sector

This reason might sound strange to some, given the belief that because exporting involves

some degree of competition in generally very competitive world markets, it is much more

difficult for inefficient exporters to survive than for inefficient local-market oriented firms. This

argument implies that exporting would bring domestic resources closer to international

opportunity costs and hence closer to what will generally produce efficient outcomes. But it is

important to note that this is true only in the context that no biased incentives are given to

exporters at the expense of domestic-oriented producers so as any allocation of resources to the

export sector truly reflects the real opportunity costs of these resources. In the Vietnamese case,

our impression is that the role of exports has been overestimated, and it seems that the

government wants to increase exports at any costs, represented by volume targets set for every

19 To save on the place, see various publications of the World Bank and the IMF regarding the effects of the Asian economic crisis on the Vietnamese economy.

22

(major) export commodity, for every year’s economic plan, without sufficient cost-benefit

analyses. Economic achievements are still mainly assessed by quantity, not by efficiency: the

number of thousand tonnes of goods produced, the amount of million dollars earned, etc., just

like under the command economy in the past. Rice production and export is a good example. By

adopting a set of promotion measures,20 rice production and export increased rapidly in the

1990s. Between 1991-2000, rice production increased by 66%. Export of rice increased even

more impressively, by 277%. The good news from export results (when rice prices were very

favorable in the first half of the 1990s), combined with the government’s explicit supports have

led to a boom in rice production, while processing industry and other supportive services fail to

keep pace with this development. Although a major part of increases in production is targeted at

world markets, but because rapidly rising supply has put great pressures on world markets,

together with inferior quality of its rice to its rivals’, Vietnam could hardly do so. As a result,

large and rising surplus emerges as represented in Table 10.

Table 10 Paddy Production and Consumption 1990-00, and Projection for 2005 (1000 tonnes)

1991 1994 1998 2000 2001 2005

Production 19622 23528 29142 32554 33000 36000

Consumption 15639 16733 18014 18637 18946 20202

Export 1554 3680 6539 5851 6897 8333

Surplus 264 759 1874 5119 4192 4385

Source: Dung (2001).

Rising production and large surplus have imposed great costs on the economy and the

society. The more rice is produced, the more it costs the government budget, which should also

be used for other development projects. In the end, as the government is able to buy only part of

the surplus due to its budget constraint, the farmers suffer the most. Dung (2001) shows that

unfavorable movements in domestic and international prices of rice, as well as prices of inputs

have led to a paradox: production has increased, rice quality has been improved, but farmers ’

income has not increased accordingly. It should be emphasized that farmers account for more

than 70% of Vietnamese population, and rice production has been the main source of income for

most of them. This implies that a majority of Vietnamese can hardly see a good chance for

improving their income, at least given the current trade and development policies that distort

market signals. This example demonstrates that good export performance does not necessarily

reflect an optimum allocation of resources, if the real opportunity costs of resources are

20 Including setting prices at which the government will buy rice from farmers if they cannot sell their rice (at higher prices) in the market, providing subsidies in fertilizer, insecticide, and other inputs, as well as other financial subsidies.

23

distorted by the government’s interference.21

VII. IMPLICATIONS AND CONCLUSIONS

Although Vietnam, which is still among the group of the poorest countries in the world, has

been striving to pull itself out of the state of underdevelopment, the important role of exports for

economic development was not recognized until 1986. After the adoption of the ‘open door’

policy, external trade experienced a rapid expansion, most impressively the export sector.

Exports grew much faster than GDP,22 and have been in fact the highest in the dynamic East

Asian region and the world as a whole. However, exports were far more unstable than economic

growth, making us skeptical that exports have played an important role in generating economic

growth in Vietnam over the last two decades or so. Our operating hypothesis therefore is that

exports have not assumed a leading role in promoting long-run economic growth in Vietnam.

Such a hypothesis is investigated via different approaches employed frequently in the

contemporary literature in this regard.

The general conclusion of the study is that, despite the fact that the export sector has been

very robust in recent years as represented by the large and increasing export share in the

Vietnamese economy, there is no firm econometric evidence to suggest that exports are an

engine of economic growth and development for Vietnam as they have been in other East Asian

economies, such as the NICs. But it is necessary to stress that this conclusion does not imply

that exports do not play an important role in the Vietnamese economy. It is likely that the export

sector has contributed to a certain extent to economic growth and development, but their

contributions are the traditional ones associated with primary producing and small, dependent

trading countries.

Our growth models are aimed to measure the dynamic gains available from shifting factors

of production to exporting, a higher productivity sector. The insignificant export coefficient in

our models implies that resources shifted out of some other use and into exports production do

not bring a net addition to total production. It can be said that the export sector has failed to

impart a growth dynamic to other sectors, a fact often witnessed in other successful East Asian

economies.

Several reasons that can be attributed to the absence of a positive causal relationship

running from exports to growth have been identified in the study. It is perfectly possible that

exports have allowed Vietnam some economies of scale, and to become more specialized, in

21 Somewhat related to this point, it is noteworthy that welfare may be reduced in the case where growth concentrated in the export sector, for this will lead to a deterioration in the country’s terms of trade unless the rest of the world is growing at the same rate or faster (Markusen et al. (1995); and Srinivasan and Bhagwati (2001)).22 Between 1975-2001, exports increased 32.4 times compared with an increase of 3.3 times in GDP.

24

areas such as agriculture, and labor-intensive manufactures like garments, and footwear. Also,

exports have likely increased competitiveness of the domestic firms and improved capacity

utilization. But it is highly possible that these static effects have been offset by the negative

effects from excessive export commodity and trading partner dependence, as well as the

government’s biased development policies. In addition, the dynamic effects expected to be

gained from export expansion, such as accelerated technological progress and external

economies, are likely very limited in Vietnam. It is therefore straightforward to suggest that

continuous export expansion is decidedly not the answer for future sustainable growth. It has

already been very high by any standards, and thus it would be impossible to maintain it

indefinitely. What may really matter are, in part, what to export (the export structure, the quality

of export goods) and where to export (trade direction), which would require much more efforts

to be transformed, and policy measures, which must include those that seek greater productivity

and efficiency in export-related production, if Vietnam is again to achieve high and sustainable

growth in the next decades.

25

REFERENCES

ADB, the Asian Development Bank, Growth and Change in Asia and the Pacific – Key Indicators

2001

Balassa, Bela, 1978, ‘Exports and Economic Growth – Further Evidence’, Journal of Development

Economics, Vol. 5, No. 2, pp. 181-9.

Balassa, Bela, 1985, ‘Exports, Policy Choices, and Economic Growth in Developing Countries after

the 1973 Oil Shock’, Journal of Development Economics, Vol. 18, No. 1, pp. 23-35.

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